NEW YORK (Reuters) - A plan by U.S. regulators to test banning the rebates stock exchanges pay to brokers that provide liquidity, in an effort to reduce potential conflicts of interest, will ultimately harm investors, the president of exchange operator Cboe Global Markets <CBOE.O> said on Wednesday.

"I have a problem with banning rebates. I think that's draconian," Cboe's Chris Concannon said at a Securities Industry and Financial Markets Association (SIFMA) conference in New York. "Impacting the rebate is literally taking money out of investors' pockets."

The U.S. Securities and Exchange Commision (SEC) in March said it planned to test the effects of lowering stock exchange fees and rebates following widespread criticism of the current pricing system.

Critics, including several large asset managers, say the pricing regime creates conflicts of interest by giving incentives for brokers to send customers' orders to the exchanges that pay the highest rebates rather than to exchanges that would obtain the best result for the end clients.

The SEC's pilot program would force exchanges to lower the fees they charge for matching buy and sell orders and the size of rebates they pay out, allowing the regulator to analyze whether the current system distorts traders' decisions about where they send orders. In some cases, rebates would be banned altogether under the proposal, which is not yet final.

But there are brokers that trade only on their own behalf, "making markets" by providing both buy and sell quotes for others to trade against in an unconflicted manner, and exchanges use rebates as a way to compensate them.

"I find it unacceptable that the SEC is going to say we can't enter into that relationship to support stocks," said Concannon.

Some of the exchange-traded funds listed by Cboe, which is the No. 2 U.S. stock exchange operator, behind Intercontinental Exchange Inc's <ICE.N> NYSE unit, need market maker support in order to maintain a tight spread, he said.

Without rebates to compensate the market makers, the spreads will widen out and investors will have to pay more to buy stocks, he added.

"So I have a fundamental problem with that, that we are going to, in the interest of potential conflicts of interest, take money out of investors' pockets."

Currently, the fees exchanges can charge for trades they execute are capped at 30 cents per 100 shares. Rebates, which not all exchanges pay, are generally in line with the fee cap.